Qantas CEO Alan Joyce is citing weakening demand due to the coronavirus outbreak as the reason for an expected decline in the airline’s earnings. Mr Joyce says he expects earnings before interest and tax in the second half of 2020 to be down as much as USD$100 million.
Half-yearly financial results announced this morning
It comes as Qantas announced its financial performance in the first half of the 2019/20 financial year.
Qantas earned an underlying profit before tax of USD$515 million and a statutory profit before tax of USD$433 million for the period between 1 July 2019 and 31 December 2019.
The underlying result was USD$2.6 million less than the same period last year. Nonetheless, Mr Joyce is pleased with the result. It comes in the face of a USD$45 million impact from global freight weakness and the disruptions in Hong Kong. There was also a USD$34 million impact from higher foreign exchange costs and a USD$36.5 million increase in operating costs from the sale of domestic airport terminals.
In a statement, Mr Joyce said;
“Overall, our performance in the first half was very positive and it shows we remain in a strong position going forward.”
He attributes the performance to capacity discipline, ongoing transformation and growing share in key markets.
Results predate the impact of the coronavirus outbreak
But these financial results predate the impact of the coronavirus. The epidemic is set to make its mark on Qantas’ financial results in the second half of the current financial year.
Earlier this month, Mr Joyce told ABC Radio that the impact of coronavirus on Qantas was not significant.
“What I can say is that the Chinese operation that’s directly affected represents around 2% of our international business and our international business is smaller in profitability than our domestic or loyalty or Jetstar business. So in its own right, it’s not significant, however the knock-on effects with people, to the tourism industry, to the economy, is something that we’ll have to monitor.”
Qantas is cutting capacity and reducing services
But today, Mr Joyce altered the forecast. In the statement, he said Qantas was taking immediate action in response to demand weakness as a result of the evolving Coronavirus situation, focused chiefly on capacity management.
“We’re taking action now to limit our exposure to softening markets. The Group’s total capacity to Asia will reduce by 15 per cent from now until at least the end of May and Qantas’ only route to mainland China (Shanghai) will remain suspended for the same period.
“We’ve also seen some domestic demand weakness emerging in February, so we’re adjusting Qantas and Jetstar’s capacity by about 2 per cent in the second half.”
Overall, Qantas’ international capacity in the second half of this financial year will decline by 3.8%, with routes to Asia bearing the brunt. There will be a 2.3% decline in domestic capacity.
Drilling down, the following routes will be affected;
- Sydney-Shanghai – will remain suspended
- Sydney-Hong Kong – reduced from 14 return flights per week to 7
- Brisbane-Hong Kong – reduced from 7 return flights per week to 4
- Melbourne-Hong Kong – reduced from 7 return flights per week to 5
- Melbourne-Singapore – flights to be operated by Boeing 787s instead of larger Airbus 380s (approx. 250 fewer seats per flight)
- Cairns-Tokyo (Narita), Cairns-Osaka, Gold Coast-Tokyo (Narita) and Melbourne & Sydney-Phuket will each be reduced by up to two return flights per week
Flights across the ditch are also impacted. Qantas will wind back flights across the Tasman Sea by 6% with cancellations on Sydney-Auckland, Melbourne-Auckland and Brisbane-Christchurch. Jetstar will reduce its Tasman flying by 5%.
An evolving situation
These changes are taking effect immediately and will run until the end of May 2020. But, as Mr Joyce noted, it is an evolving situation.
“What’s important is that we have flexibility in how we respond to Coronavirus and how we maintain our strategic position more broadly. We can extend how long the cuts are in place, we can deepen them or we can add seats back in if the demand is there. This is an evolving situation that we’re monitoring closely.”
Today’s reduction is the equivalent of taking 18 aircraft out of service. Speaking to an Australian audience, Mr Joyce summed up the impact of the coronavirus outbreak and subsequent downturn in travel demand this morning;
“When you combine the capacity action we’re taking, with the drop in fuel price since Coronavirus escalated, we expect to mitigate the total impact on our bottom line to somewhere between (AUD)$100 million and (AUD)$150 million in the second half.”
It is a sharp and decisive response from Mr Joyce who only two weeks ago was downplaying the impact of coronavirus on the airline. While flights to China only account for 2% of Qantas’ international business, it is the weakening demand on other routes into Asia that’s starting to bite.
Mr Joyce re-iterated how well-positioned Qantas is to see off the current challenges. These challenges face not just Qantas but the wider commercial aviation market. But with flight cancellations and capacity decreases now scheduled into mid-2020, this still has a way to run.